HOUSEHOLDS DEBT BURDEN: AN ANALYSIS BASED ON MICROECONOMIC DATA*

HOUSEHOLDS DEBT BURDEN: AN ANALYSIS BASED ON MICROECONOMIC DATA* Luísa Farnha** 1. INTRODUCTION The rapd growth n Portuguese households ndebtedness n the past few years ncreased the concerns that debt could become excessvely burdensome to households. The ncrease n the aggregate- debt burden rato, whch occurred durng the second half of the 199s, despe the downward trend of nterest rates, renforced such concerns. As a matter of fact, ths rato grew sgnfcantly durng the second half of the 9s, manly reflectng rsng households ndebtedness, and stablsed after. The changes n the aggregate debt burden rato provde some useful nformaton on changes n consumpton and households nvestment as a whole. However, should be stressed that those changes do not necessarly mply movements n a partcular drecton n the fnancal restrant of ndvdual households. The aggregate debt burden rato, n perod t, whch s defned as the estmate of nterest plus capal repayments by households n that perod dvded by the estmate of aggregate dsposable ncome,.e.: ND NT Debt servce payments Dsposable ncome (ND beng the number of ndebted households and NT the total number of households) depends both on the average rato of ndebted households * The vews expressed are those of the author and not necessarly those of the Banco de Portugal. ** Economc Research Department. and, to a large extent, on the number of ndebted households. Thus, an ncrease n the aggregate ndcator s consstent wh the stably of the ndvdual debt burden f the ncrease n the number of ndebted households s suffcently strong. It should be noted that the aggregate rato may also be read as a weghted average of ndvdual debt burden ratons (n whch weghts correspond to the ratos of each household s dsposable ncome on total dsposable ncome): ND Debt servce payments Dsposable ncome Dsposable ncome NT Dsposable ncome Thus, a sngle value of the aggregate- measure s consstent wh several combnatons of ndvdual debt burden and ncome across households. From the pont of vew of the stably of the fnancal system, s reasonable to assume that the mpact of an ncrease n the nterest rates n the case of a relatvely homogeneous debt burden across households wll dffer from the case where, for nstance, the hgher burden concentrates n the lower-ncome classes. These nal consderatons show the mportance of usng mcro data n the analyss of these ssues. Only wh ths type of data s possble to characterse n detal the dstrbuton of the households debt burden rato. Therefore, the usual measures of central tendency (e.g. the mean) must be complemented wh measures that capture the poson of households n the tals of the dstrbuton (e.g. the hgher percentles), where Banco de Portugal / Economc bulletn / September 4 17

s lkely to fnd the more relevant suatons from the pont of vew of fnancal stably. The analyss presented n ths artcle used the mcro data extracted from the results of the Survey on Households Wealth and Indebtedness conducted n and n. Data stemmng from ths survey should, however, be used wh cauton because, accordng to the results of the Census, there s strong evdence that some households, n partcular the younger, are underrepresented, manly n the sample. As economc theory (e.g. the lfe hypothess) suggests that younger households may be hghly ndebted and have a hgh debt-servce burden, ther weak representatvy n the sample would bas downward the average debt burden rato. Furthermore, would ncrease the uncertanty about the conclusons on the behavour of the rato n that partcular age class. However, despe the mentoned lmatons, s possble to conclude that, on average, there was not a sgnfcant ncrease n the debt burden rato at the of ndvdual households. Secton 2 brefly presents the data and methodology. Secton 3 analyses the results and secton 4 concludes. 2. DATA AND METHODOLOGY The analyss presented n ths artcle s based on the mcro data from the Survey on Households Wealth and Indebtedness (IPEF), conducted by the INE wh the support of the Banco de Portugal n and. The un of analyss of the IPEF s the household. The survey ncludes detaled nformaton on wealth, ndebtedness, ncome and expendure (n partcular payments assocated wh debts) of a sample of Portuguese households. Ths nformaton s complemented by other aspects, such as age, of educaton and labour market suaton of the head of household. (1) It was mentoned above that developments n the aggregate debt burden rato depend both on the change n the number of ndebted households and on the ndvdual ratos of these households. The analyss presented n ths artcle focuses manly on the second aspect, usng two dfferent (1) For further detals on IPEF, see the artcle The effect of demographc and soco-economc factors on households ndebtedness, June 3 ssue of the Economc bulletn. approaches: descrptve analyss and regresson analyss. The descrptve analyss characterses the dstrbuton of the debt burden rato of ndebted households, usng both the sample average and the 75 th percentle. These statstcs were calculated for several sub-samples defned accordng to pars of households characterstcs that are partcularly relevant n the analyss of ndebtedness, such as the household s ncome and age and the of educaton of s head. The pars of varables selected were, on the one hand, ncome and age and, on the other hand, ncome and educaton. Wh ths procedure, the effect of one of the varables on the debt burden rato was solated from the effect of the other. In turn, the regresson analyss provdes an estmate of the effect of each one of the characterstcs, smultaneously controllng for the effect of all the other explcly ncluded n the model. Gven that the varable to be explaned households debt burden takes the value zero wh a non-zero probably and s contnuous for values above zero, the tob methodology was used n ths analyss. The followng explanatory varables were ncluded n the model: ncome, age, gender, maral status, of educaton, labour market suaton and household s number of elements. To faclate the nterpretaton of results, household s number of elements, ncome and age were measured as the dfference between the value of the varable n the household and s value n a reference household,.e., a household wh two elements, earnng the average wage and whose head s 4 years old. The remanng attrbutes were defned through dummy varables, whch take the value 1 n a certan status and otherwse. As usual, the dummy varables charactersng the status of the reference household were not ncluded n the model (head marred, male, wh the 3rd of basc ng and employee). To capture potental nonlneares n the effect of ncome and age on the debt burden, the ncome squared and the nteractve varable obtaned from the product between ncome and age were also ncluded as explanatory varables. (2) The ncluson of nteractve varables resultng from multplyng each explana- (2) A specfcaton ncludng the age squared was also estmated, n whch the effect of ths varable was not sgnfcant. 18 Banco de Portugal / Economc bulletn / September 4

Table 1 SUMMARY CHARACTERIZATION OF THE SAMPLE, BY CLASSES OF INCOME AND AGE Income Age Up to years old 31 to 4 41 to 5 51 to 6 Total Indebted households ( n percentage).... 1. 17.7 14.3 1.2 12.2 Below 5 Average of the debt burden....1875.2452.3199.185.1877 75th percentle of the debt burden....3735.3778.3922.1242.2879 Relatve frequency ( n percentage).....17.91.74 1.9 3.71 Indebted households ( n percentage).... 32.9.5 25.6 15.8 22.7 From 5 to 1 Average of the debt burden....1875.199.1861.1428.1763 75th percentle of the debt burden....227.2958.97.1712.27 Relatve frequency ( n percentage).... 2.15 7.51 7.92 8.9 25.66 Indebted households ( n percentage).... 39.6 48.4 39.3 23.8 35.3 From 1 to 15 Average of the debt burden....1547.1553.1366.1178.1381 75th percentle of the debt burden....2157.89.1864.1622.1887 Relatve frequency ( n percentage).... 1.73 8.66 11.88 7.84.12 Indebted households ( n percentage).... 57.1 62.3 46.2 38.3 46.4 From 15 to 25 Average of the debt burden....1963.1195.1114.946.1111 75th percentle of the debt burden....22.1781.1675.1266.1629 Relatve frequency ( n percentage).....99 6.68 9.57 8.75 25.99 Indebted households ( n percentage).... 5. 78.8 65.5 41.4 56.2 Above 25 Average of the debt burden....939.932.842.543.763 75th percentle of the debt burden....1616.1288.122.671.993 Relatve frequency ( n percentage).....25 3.38 5.94 4.95 14.52 Total Indebted households ( n percentage).... 35.8 43.3 37.5 22.9 32.2 Average of the debt burden....174.1538.1359.172.1338 75th percentle of the debt burden....2222.18.1736.1479.1825 Relatve frequency ( n percentage).... 5.28 27.15 36.6 31.52 1. Source: Inquéro ao Patrmóno e Endvdamento das Famílas do INE. tory varables by D (a varable whch takes value 1 f an observaton relates to and otherwse) makes possble to check whether the effects of the relevant varables changed sgnfcantly between and. 3. RESULTS Table 1 presents the sample average and the 75 th percentle of the debt burden rato of sub-samples defned accordng to ncome and age n the survey. The frequency of households and the share of those ndebted n n each sub-sample are also shown. As can be seen from ths table, households n the lowest-ncome class (below 5 per month) and n the lowest age class (up to years old) are underrepresented n the sample. In most of these cases, the number of households s very small. Therefore the fgures calculated for these sub-samples are very naccurate n statstcal terms. Thus, a greater emphass s put on the remanng sub-classes, presented n the shaded area of Table 1. The results should be nterpreted wh cauton, snce, as mentoned, there s evdence that some households, especally the younger, are underrepresented n the sample. As representatvy s not ensured, summary statstcs for the total sample may not be reflectng the Portuguese realy. Addonally, the results obtaned may underestmate the actual change n the average debt burden, f loans more recently taken out are underrepresented (chefly admtng that they (3) More recent loans are probably assocated wh hgher ratos, snce nflaton has eroded the nomnal value of payments on loans taken out n prevous years. Banco de Portugal / Economc bulletn / September 4 19

Chart 1 AVERAGE DEBT BURDEN IN SUB-SAMPLES OF AND SURVEYS Income and age 7 6 5 4 1 below 5 from 5 to 1 from 1 to 15 from 15 to 25 above 25 Source: INE, Inquéro ao Patrmóno e Endvdamento das Famílas. Chart 2 DEBT BURDEN IN THE 75 th PERCENTILE IN SUB-SAMPLES OF THE AND SURVEYS Income and age 1 9 8 7 6 5 4 1 <= years 31-4 years below 5 from 5 to 1 from 1 to 15 from 15 to 25 above 25 Source: INE, Inquéro ao Patrmóno e Endvdamento das Famílas. 11 Banco de Portugal / Economc bulletn / September 4

Chart 3 AVERAGE DEBT BURDEN IN SUB-SAMPLES OF THE AND SURVEYS Income and educaton 7 6 5 4 1 upper upper upper upper upper below 5 from 5 to 1 from 1 to 15 from 15 to 25 above 25 Source: INE, Inquéro ao Patrmóno e Endvdamento das Famílas. Chart 4 DEBT BURDEN IN THE 75 th PERCENTILE IN SUB-SAMPLES OF THE AND SURVEYS Income and educaton 11 1 9 8 7 6 5 4 1 upper 3rd second./ upper upper upper upper below 5 from 5 to 1 from 1 to 15 from 15 to 25 above 25 Source: INE, Inquéro ao Patrmóno e Endvdamento das Famílas. Banco de Portugal / Economc bulletn / September 4 111

Table 2 SUMMARY RESULTS OF THE TOBIT MODEL FOR THE DEBT BURDEN Margnal effects n and dfferences from Effect n Effect n mnus effect n Value t-statstcs Constant... -2.4.. Households monthly ncome... 2.4 -.99-1.7 Households monthly ncome squared... -.3. 1.94 Age of the head (years)... -.2 -.3 -.83 Head s sngle... -4.7 1.23.7 Head has no formal educaton... -5.3 -.62 -.44 Head has Basc ng (1st )... -3.4 -.82 -.93 Head has Basc ng ( )... -1. -.9 -.87 Source: Inquéro ao Patrmóno e Endvdamento das Famílas of INE. Notes: (a) Only results for sgnfcant varables. (b) The margnal effects, measured n percentage ponts, are defned aganst a benchmark that s a household comprsng two elements, earnng monthly 12 (equal to the sample average at prces); whose head s male, 4 years old, marred, has completed the 3rd of ng and s employee. are usually assocated wh hgher debt burden ratos). (3) In the second half of the 199s, the youngest households were the man contrbutors to the ncrease n aggregate ndebtedness. As they are underrepresented, n partcular n, s expected that loans taken out more recently are also underrepresented. Table 2 presents the most relevant results of the regresson estmates, namely the cross-secton margnal effects statstcally sgnfcant n and the dfferences between those effects n and n. Charts 1 to 4 show the average and the 75 th percentle n sub-samples defned accordng to ncome-age and ncome-educaton pars. The jont readng of the varous peces of nformaton pont to the followng conclusons: the percentage of ndebted households ncreased between and, although the actual ncrease n the number of ndebted households s nsuffcently reflected n data n Table 1, gven the weak representatvy of some subclasses, n partcular the youngest; the heurstc observaton of averages of the dstrbuton of the debt burden ratos n the sub-samples bult accordng to the above mentoned pars of varables (age and ncome; educaton and ncome) ponts to a reducton n the debt burden rato between and n most sub-samples (Charts 1 and 3); n turn, the results of the regresson suggest that the reducton n the average debt burden, reflected n the constant of the model, s not statstcally sgnfcant; extreme suatons of the debt-burden rato are more lkely to be found n lower-ncome subclasses, whch show relatvely hgher average ratos, both n and n ; ths concluson s suggested by the readng of 75 th percentle of the dstrbuton (Charts 2 and 4); moreover, controllng for age, the average debt burden rato (and 75 th percentle) seems to decrease wh household s ncome, both n and ; ths concluson s not confrmed by the econometrc analyss, where the non-lnear specfcaton suggests that the debt burden rato ncreases for lower- -ncome households but decreases from a hgher of ncome onwards (Table 2); consderng only classes wh ncome above 5, due to the fact that the class up to 5 s represented by a small number of households, the average rato and the 75 th percentle n each class of ncome, n most cases, 112 Banco de Portugal / Economc bulletn / September 4

decrease wh age (Table 1 and Charts 1 and 2); the regresson results are consstent wh the prevous ones, suggestng that ncreasng the age of the household s head by one year leads to a reducton of around.2 percentage ponts n the debt burden rato; the concluson s vald for the and samples; accordng to the descrptve statstcs, there s less evdence about the effect of the of educaton on the debt burden than that of ncome and age; the ndcator seems to grow wh the of educaton, more clearly from the second subclass onwards (whose elements completed the second ) both n and ; n turn, the econometrc analyss ponts to a systematc and monotonous effect of the of educaton on the debt burden up to the 3rd of ng; n partcular, households whose head has no formal educaton show a lower average debt burden (of around 5.3 percentage ponts) than that of the reference household (.e. the household whose head completed the 3rd ); the households whose head s sngle have a debt burden sgnfcantly lower than those whose head s marred, both n and n ; fnally, the margnal effects of age, educaton and maral status of the household s head n are not sgnfcantly dfferent from the effects n. 4. CONCLUSION The aggregate estmates of Portuguese households debt burden rato usually referred to n the publcatons of the Banco de Portugal defned as the estmate of households debt burden dvded by the estmate of dsposable ncome pont to a strong ncrease n ths ndcator n the second half of the 199s ( has doubled from 1995 to ). In turn, the emprcal evdence obtaned on the bass of the mcro data stemmng from the IPEF n and n suggests that, on average, ndvdual debt burden ratos have not ncreased sgnfcantly. How s possble to reconcle these two results? The explanaton s probably assocated wh the strong ncrease n the accessbly of households to cred durng the second half of the 199s. It can therefore be concluded that the ncreased accessbly of households to bank fnancng was not acheved at the expense of the creaton of hghly crcal suatons n terms of the fulflment of debt servce commments. The decrease n nterest rates over ths perod allowed access to cred for a growng number of households, whout mplyng the acceptance by cred nstutons of extreme suatons n terms of debt burden ratos. However, the fact that the ncrease n access to cred was stronger for the younger and for those wh lower s of formal educaton (see the artcle publshed n the June 3 ssue of the Economc bulletn) ntroduces elements of vulnerably, n aggregate terms, to an ncrease n unemployment. It s plausble to assume that these are the frnges of the populaton that, n the former case, show less permanent labour tes or, n the latter case, lower capacy to overcome an unemployment epsode. The usual requrement, by banks, of personal guarantees n addon to the mortgage collateral n cred granted to younger people allows a mgaton of rsks n ths segment. However, the necessary data to assess the mportance of these suatons are not avalable. Banco de Portugal / Economc bulletn / September 4 113